Amazon is a bridge troll, a rent seeker

Posted by John Reed on Jun 30, 2017

The long 6/29/17 Wall Street Journal article about Nike deciding to sell through Amazon is excellent. (“Retail Shift Pushed Nike to Amazon”—Google it).

Nike refused for years because they thought the graphics on the Amazon site were too crappy to properly display a branded product like Nike products. I suspect they also did not want to give Amazon such a cut.

Unauthorized Amazon sellers

The third parties selling Nike products on Amazon without authorization were buying them in tiny batches—to avoid detection by Nike—from authorized Amazon distributors on sale and such then selling them for slightly more. They also bought them from the Sports Authority bankruptcy in large quantities.

In the new arrangement, Amazon agrees not to allow third-parties to sell Nike products designated by Nike. I do not know the legal definition of illegal restraint of trade, but that sounds like it might qualify. Also, from a PR standpoint, low-price Amazon is letting a huge corporation prevent consumers from buying its products for lower prices.

I cut Amazon out to regain price control and margin

Little old me was actually in a similar position as Nike with regard to Amazon back in the 1990s. They started selling my books. “Yay,” I thought. Then a lady called wanting to know why she should buy one. I explained. She was convinced. I asked for her address. “Why?” she asked. “So I can mail it to you,” I said. In a voice dripping with contempt, she informed me, “I’m not going to buy it from you. I’ll buy it from Amazon because they give a 20% [at the time] discount.”

So I had to discount my book even more deeply to every customer after that to avoid the percentage of my sales through Amazon—where I made maybe seven dollars a book—going up at the expense of my direct sales where I made more like $26 a book.

I got a 257% raise from firing Amazon

The first thing I did when I severed my relationship with Amazon was raise those prices back up to normal. My net income went up 257% the year after I got out of book stores and Amazon.

I was surprised to read that Apple sells through Amazon. Under John Scully, they allowed third parties to sell Mac OS computers not made by Apple. Steve Jobs hated that and ended it when he came back.

No commoditization

There are two issues with Apple selling through Amazon. As long as Apple is the only one selling their products on Amazon, or anywhere else, there is no loss of price control through commoditization as there would be if there were even a single other seller of Apple products besides Apple.

But there IS margin cannibalization

But that would not fix margin cannibalization. Apple and Nike make more money when they sell from their web site to consumers than when they sell through Amazon’s web site. Apple and Nike could legally sell cheaper on their own Web site, but Amazon would probably not allow that by contract.

So Nike essentially has decided they are net better off selling at lower margins through Amazon than competing with large numbers of unauthorized sellers selling at bargain prices. Although Nike made some profit on those unauthorized sales when the sellers paid way above wholesale to acquire the Nikes they sell. In some cases, the unauthorized sellers would pay strangers $20 a pair to buy Nikes for them at retail stores during sales.

From Nike’s standpoint, those third-party sellers were running a 24/7, 365 days a year sale of Nike products thereby causing more and more customers to prefer Amazon as the venue for buying Nike products.

Amazon is not providing incremental sales, or anything else that manufacturers cannot provide better without Amazon

Long term, Apple and Nike and the rest of the manufacturers need to recognize that Amazon is cannibalizing them. Amazon is not giving manufacturers incremental sales, which was always my motive for selling through book stores and Amazon.

Rather, Amazon is merely taking away high-margin sales that Apple and Nike would have gotten if Amazon did not exist and turning them into lower-margin sales. Amazon is a bridge troll, a rent seeker. They add no value nor do they perform any service better or cheaper than the manufacturers could. All Amazon does is make the search easy and cut prices.

Manufacturers can always beat Amazon on price and still make more money from the sales where they cut Amazon out than they do where they sell through Amazon. They have the potential to create a superior marketplace that costs less than Amazon is taking per dollar of sales.

The National Association of Manufacturers needs to create a better buyer search engine, presumably with help from Google and/or Bing. They’d better get to work because they are now training their loyal high-margin customers to get their products from low-margin Amazon.